Rules for deferral of income from gift card sales clarified

BY SALLY P. SCHREIBER, J.D.

The IRS issued guidance clarifying that taxpayers that sell gift cards can defer recognizing income from the sale of gift cards redeemable by an unrelated third party until the year after the payment is received (Rev. Proc. 2013-29, clarifying and modifying Rev. Proc. 2011-18).

With the rapid growth in the use of gift cards in recent years and the increasing variety of ways in which they are sold and redeemed, the IRS has been issuing guidance to address tax accounting issues regarding recognition of revenue and expenses related to gift cards and gift certificates.

Revenue from sales of gift cards is not recognized immediately for financial reporting purposes and may also be deferred for tax purposes. Under the new rule, if a gift card is redeemable by an entity whose financial results are not included in the taxpayer’s applicable financial statement (as defined in Rev. Proc. 2004-34, §4.06), the taxpayer recognizes in income payment for a gift card to the extent the gift card is redeemed during the tax year. For a taxpayer without an applicable financial statement, if a gift card is redeemable by an entity whose financial results are not included in the taxpayer’s financial statement, a payment for a gift card is treated as earned by the taxpayer to the extent the gift card is redeemed by the entity during the tax year. Any payment the taxpayer receives that is not recognized in income in the year of receipt must be recognized the next year.

Because the rule as it was originally drafted in Rev. Proc. 2011-18 appeared to apply only to gift cards that were redeemable by related parties, this clarification was necessary to permit deferral in cases where the cards were redeemable by an unrelated entity. The new rule applies to tax years ending on or after Dec. 31, 2010.

  Rev. Proc. 2013-29

By Sally P. Schreiber, J.D., a JofA senior editor.

SPONSORED REPORT

Click-through nexus: Pushing the boundaries of sales tax compliance

Sales and use tax compliance has been complicated by nexus expansion. In this report, we provide an overview of this issue and include a handy state-by-state summary of click-through nexus or notification requirements.

QUIZ

News quiz: Making allowances for the kids and the economy

Recent news gives CPAs insight into Americans’ attitudes about children and money and gauges outlook on the economy. See how much you know about recent news and reports with this quiz.

CHECKLIST

Auditing risks in culture

Cultural flaws can seriously damage an organization. Here’s how internal auditors can reduce risks by embedding culture audits into existing audit programs.